Arvest Bank Friday Forum July 20, Chad Wilkerson

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1 Arvest Bank Friday Forum July 2, 212 Chad Wilkerson Oklahoma City Branch Executive and Economist Federal Reserve Bank of Kansas City

2 Overview of the Federal Reserve System The Fed consists of three main entities: Board of Governors: 7 members appointed by U.S. President Federal Reserve Banks: 12 total; semi-independent by design Federal Open Market Committee: 19 members; 12 voting As with most central banks, the Fed s primary responsibilities fall within four general areas: Lender of last resort provide liquidity in times of crisis Monetary policy promote full employment and low inflation Bank regulation ensure safety and soundness of banks Financial services bank for banks, bank for federal govt.

3 Federal Reserve Districts and Office Locations

4 The Oklahoma City Branch of the Federal Reserve Bank of Kansas City Functions 35 staff Economic research and outreach for U.S. monetary policy purposes Examinations and inspections of Oklahoma financial institutions Economic and financial education outreach to teachers and citizens Community development outreach to low and moderate income areas 212 board of directors Jim Dunn (chair), Chairman, Mill Creek Lumber and Supply, Tulsa Linda Capps, Vice Chairman, Citizen Potawatomi Nation, Shawnee Pete Delaney, Chairman, CEO, & President, OGE Energy Corp., OKC Jacque Fiegel, Senior EVP and COO, Coppermark Bank, OKC Doug Tippens, President and CEO, Bank of Commerce, Yukon K. Vasudevan, Chairman, Service and Technology Corp., Bartlesville Rose Washington, Exec. Director, Tulsa Economic Development Corp.

5 U.S. Economy and Monetary Policy U.S. economic growth has slowed in recent months, as uncertainties have risen again The FOMC expects continued improvement in unemployment, and for inflation to stay low The range of views among FOMC members about monetary policy are relatively wide

6 U.S. economic growth has slowed, with jobs and survey numbers the lowest since 29 U.S. Private Payroll Employment and Business Indexes 6 Change from previous month, thousands Index Private Employment (left axis) ISM Manufacturing Index (right axis) ISM Non-Manufacturing Index (right axis) Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Source: Institute for Supply Management, Bureau of Labor Statistics

7 Readings on the ISM factory index below 5 have not always meant recession ISM Manufacturing Survey Indexes 65 Index ISM Composite (left axis) ISM Exports (right axis) Oct-94 Oct-96 Oct-98 Oct- Oct-2 Oct-4 Oct-6 Oct-8 Oct-1-4 Sources: ISM, FRBKC Manufacturing Survey

8 Factories have less than 1% of U.S. and District jobs, but they ve spurred growth lately 6% Percent Manufacturing's Share of Total Job Growth, Last 6 Months (Nov-211 to May-212) 56% 5% 4% 3% 34% 24% 23% 2% 17% 2% 16% 1% % US Tenth District NM MO KS OK CO NE WY 4% % Source: U.S. Bureau of Labor Statistics

9 District manufacturers say the European impact has been moderate and more indirect How is the Current Situation in Europe Affecting Your Business? Tenth District Manufacturing Survey, June Percent No Effect Negative Indirect Effect (Rising Uncertainty) Negative Direct Effect (Declining Exports) Mixed or Positive Effect (Falling Import Prices) Source: FRBKC Manufacturing Survey

10 The European Trilemma Sovereign debt crisis Poor fiscal management and rising bond yields in some countries threaten fiscal sustainability. Banking crisis A property bust in some markets and a decline in sovereign debt values have impaired the balance sheets of some Euro zone banks. Slow growth and recession Tighter fiscal policy and financial conditions, plus the uncertain climate, is weighing on European growth

11 The impact on the U.S. of an intensification of the European crisis Long-term rates would fall and support U.S. economic activity Credit standards would likely tighten, so fewer households and businesses would have access to the lower rates Appreciation of the U.S. dollar would weigh on exporters Commodity prices would likely decline Sharp fall in confidence and heightened uncertainty

12 Looking ahead, purchasing managers in the region were mostly optimistic in June Tenth District Manufacturing Expectations Six-Months Ahead, Seasonally Adjusted 5 Index Production Capital Spending Employment Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Source: KC, Dallas FRB Manufacturing Surveys

13 ut Tenth District factory exports to Europe are declining, and China s boost has lessened Tenth District Manufacturing Exports Q1 28 Q Percent change, year-over-year China Europe Q2 28 Q2 29 Q2 21 Q2 211 Q2 212 Note Q2 212 includes April and May data only Source: WISERTRADE

14 Exports are a relatively small part of the Tenth District economy, and even the nation s Exports as Share of GDP, Percent 12 1 Rest of World China Europe U.S. 1J NE KS MO CO WY OK NM Sources: U.S. Bureau of Economic Analysis, USDA, WISERTRADE

15 Financial stress in Europe remains higher than a few years ago, but is stable in U.S. Eurozone and U.S. Financial Stress 6 Index European Financial Stress Index U.S. Financial Stress Index May-3 May-4 May-5 May-6 May-7 May-8 May-9 May-1 May-11 May-12 Source: FRBKC

16 The fiscal cliff and political uncertainty are also weighing on the U.S. economy Estimated Impact on 213 GDP Worst Case Percentage points End payroll tax holiday End extended unemployment benefits AMT fix expires and 23 tax cuts lapse Sequestration (automatic discretionary cuts) -4 Sources: Goldman Sachs

17 At its June meeting, the FOMC expected unemployment to gradually fall further Percent Unemployment Rate Seasonally Adjusted June FOMC Forecast Ranges in Yellow Long Term Source: U.S. Bureau of Labor Statistics, FOMC

18 And for inflation to remain at or below its long-term target PCE Inflation Index 1 Percent change, year-over-year June FOMC Forecast Ranges in Yellow Long Term Source: U.S. Bureau of Economic Analysis, FOMC

19 The majority of FOMC members expect interest rates to stay low through Percent Federal Funds Rate Year-end target Long Term 8 6 June FOMC Forecast Ranges in Yellow 6 4 (7) 4 2 (3) (3) Note Number of participants who project the initial increase will occur in the specified year in parenthesis Source: U.S. Bureau of Economic Analysis, FOMC

20 The Fed s balance sheet is at historically high levels Federal Reserve Balance Sheet Dollars, trillions Assets Targeted lending programs Short term lending Rescue operations MBS & agency debt Treasury securities Currency -1-1 Reserves -2-2 Liabilities Other -3-3 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Source: Federal Reserve Board

21 The Oklahoma Economy Oklahoma economic growth remains stronger than the nation, but has slowed The relative strength reflects solid energy, manufacturing, and real estate sectors Europe is less of a direct risk to the state, but lower energy prices are a concern

22 There remains considerable variation in economic strength in the nation and region Employment Growth, Year-over-Year (percent) May (.2) (.1) 2.2 Source: U.S. Bureau of Labor Statistics

23 Except for Tulsa, employment in Oklahoma is back to or above pre-recession levels 12 Index: Jan-8=1 Level of Payroll Employment Through May OKC 1 98 Rest of OK U.S Tulsa Jan-8 Jan-9 Jan-1 Jan-11 Jan Source: U.S. Bureau of Labor Statistics

24 Unemployment is very low in northwest and southern Oklahoma and Washington Co.! County Unemployment Rates May 212 Source: OK Employment Security Commission

25 But Oklahoma job growth has slowed since winter, across a number of industries Annualized Job Growth by Industry Past Six Months of Data 3 Percent 25 2 Winter (Dec-Feb) Spring 212 (Mar-May) Total Energy Trade & Transp. Business Svcs. Manuf. Govt. Leis. & Hosp. Educ. & Hlth. Constr. Source: Bureau of Labor Statistics

26 Home prices continue to hold up much better in Oklahoma than in the nation Home Price Index 11 Index: 27Q2= OK U.S Q1 24Q1 26Q1 28Q1 21Q1 212Q1 Source: FHFA

27 And banks remain in much better shape than in the nation as a whole Noncurrent Loans as a Share of Total Loans Commercial Banks 6 Percent U.S OK Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 28 Q1 29 Q1 21 Q1 211 Q1 212 Source: FDIC

28 But Oklahoma energy activity has been flat for the past year (albeit at a high level) Oklahoma Rig Count 25 Number of rigs 25 2 Oil Natural Gas Jul-7 Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 Source: Baker Hughes

29 Conclusions Growth in the U.S. economy has slowed moderately, as concerns about Europe and politics have risen Inflation has remained low, and monetary policymakers disagree about future paths Oklahoma economic growth remains better than in the nation and region, but job growth has slowed recently

30 Questions? For more information about the Oklahoma economy, subscribe to the quarterly Oklahoma Economist at:

Chickasha Rotary Club March 8, Chad Wilkerson

Chickasha Rotary Club March 8, 212 Chad Wilkerson Oklahoma City Branch Executive and Economist Federal Reserve Bank of Kansas City www.kansascityfed.org/oklahomacity The Fed and the U.S. Economic Outlook